Five Hundred Words 12/04/2018

Tuesday, December 4, 2018

Daily Writing

9:10 AM

Initial impressions of the day

Yesterday we touched on commodities moving higher.[1] Intuitively you’d think that the spike in demand for copper and other base metals would be due to the tentative truce between the US and China. However, we can’t confirm this, and the dramatic downturn we witnessed today could dispel this theory.

2:40 PM

OK so maybe no trade deal

At its lows the Dow Jones Industrial average fell by as much as 800 points, or more than 3.00% on Trump’s sudden wavering views on China. Now, after a brief period of relative clarity regarding US-China trade tensions, that all went out the window after President Donald Trump tweeted that his team would be “seeing wither or not a REAL deal with China is actually possible” by early March, the next deadline in the talks. This uncertainty exacerbated fears that the global economy could be slowing.

Many of the events that the market believed would help improve certainty moving into the new year haven’t panned out. Firstly, there was a widely held belief that mid-term elections on November 6, 2018 would allow the market to price in potential higher budget deficits and adjusted fiscal policy that typically accompanies democratic electoral victory

4:11 PM

OK so maybe the sky is falling

Today was an absolute slaughter in the markets. The SPY fell 3.20%, the DOW fell more than 800 points at its peak, U.S. 10-year Treasuries dipped below 3.00% before settling at 2.91%. Tellier Holdings Apprentice Fund fell 4.28% primarily on weakness in financials and banks. The BLK dividend capture strategy turned out to be a complete disaster. We’ll end up making $70 from the dividend pay out at the end of the month, but on the day BLK dropped by more than 6.00%, something our risk models placed a 0.10% probability on BLK dropping more than 6.00%. Over the past five years BLK has only dropped more than 6.00% on two other occasions, once in late January of this year and once previously in 2014.

Reflections on a -4.00% day

Today was supposed to be a calm day. I had my strategy in place for when things went right. However, I had no contingency plan for when things went wrong. I will shrug off today’s poor result, and I will continue to focus on the basics. I will continue to seek permanence. I must remember to move with the overall trend. Only after I determine, the secular trends should I make trade decisions.

I must be honest with myself if I’m going to improve. I will be accountable. Today’s performance was weak because my risk management philosophy was deeply flawed. As soon as BLK began to drop from 434 down to 424, I felt it was highly unlikely to continue moving further. I added to the BLK position 424.80 because I wanted to capture the additional dividend.

By that point, BLK was already trading down roughly. BLK had only fallen more than 3.00% in a day less than 5% of the time over the past five years.

Unfortunately, I failed to take into account the risks posed to the banking sector Given BLK’s historical volatility and past performance, and I felt the downside would be limited as we crossed the ex-dividend date on Thursday, December 6. I did not anticipate a 5.00% drop in the banking sector with minimal warning, especially given the subdued volatility on Monday.

I felt rushed to decide on BLK quicker than I liked because I knew the market would be closed on Wednesday to honor the late President George HW Bush. I felt encouraged to make this move because I used the same strategy to profit on MCD and TLT. According to my Blackstone, INC. (NYSE: BLK), over the last five years BLK had only experience three drawdowns greater than 5.00%. Today happened to be the second largest draw down, only after the October 10, 2018 decline from which the broader market has yet to fully recover.

Although my mistake cost me roughly 2.00% of my portfolio today, my risk management in the other areas of my portfolio was quite strong. Defensive stocks such as MCD, KO, and SBUX all did their jobs and held steady, all finishing roughly even on the day perhaps even slightly up.

I still do not have a great understanding of the impact of bond prices on overall rates and the profitability of banks. From a macro perspective I am working how the market will behave now that the fear of an inverted yield curve is looking to bubble up.

There are still many things to learn, I feel I can take this experience as a learning opportunity. I am still in the game, and I will strive to improve on my risk management and trading strategy.